Debt problems: How country’s borrowing situation could impact you

Thursday

Oct 10, 2013 at 12:01 AMOct 10, 2013 at 2:38 PM

What is the problem with the nation’s debt, and how could it impact you now or in the future?

Matthew Tessnear

The national debt. Those words, along with “government shutdown,” have dominated local and national TV news coverage in recent weeks. The government shutdown has been estimated to hit American taxpayers with an impact in the billions of dollars. But some economists and political leaders say the country’s debt debacle stands to more significantly impact Americans. Republicans have reportedly offered to raise the country's debt limit if President Obama agrees to negotiations on spending cuts. So, what is the problem with the nation’s debt, and how could it impact you now or in the future?

The Associated Press contributed to this report.

By the numbers

77 – The number of times Congress has increased the borrowing limit since 1962

$16.7 trillion – The current American debt limit

$642 billion – The Congressional Budget Office projects that’s the deficit for the budget year that ended Sept. 30, likely the smallest deficit in five years due to higher tax revenue and government spending cuts. The four previous years, the country posted deficits of more than $1 trillion each.

$60 billion – How much it can cost in a day to operate the U.S. government, according to the country’s Treasury secretary.

1 percent – If the debt limit wasn't raised through November, Goldman Sachs estimates that government spending would be cut $175 billion. That’s equivalent to about 1 percent of the economy.

What is the debt limit?

It’s a borrowing limit that is a cap on how much debt the government can accumulate to pay its bills.

Why is it an issue?

The government must constantly borrow because its spending has long exceeded its revenue. The first borrowing limit was enacted in 1917.

How close is the U.S. to exceeding the cap?

The nation actually reached its debt limit in May. Treasury officials have made accounting moves since then to continue financing the government without further borrowing. Treasury Secretary Jacob Lew said those measures would be ineffective as of Oct. 17.

What happens next?

If the debt limit was not raised, the government would have to pay its bills from cash on hand – an estimated $30 billion – and tax revenue. The cash and tax money aren’t expected to be enough. The government could pay its bills for a few days, according to the nonpartisan Congressional Budget Office. The cash would be expected to run out sometime Oct. 22-31.

How could the issue be solved?

Experts say there are several solutions, including the Treasury making debt payments its top priority or making its interest payments first and delay all other payments. But according to a report by the Treasury’s inspector general during a shutdown over the borrowing limit in 2011: “There is no fair or sensible way to pick and choose among the many bills that come due every day.”

Who would feel impacts if debt limit not increased?

* No longer able to borrow, the government could spend only from its revenue from taxes and fees. This would force an immediate spending cut of 32 percent, the Bipartisan Policy Center estimates.

* Social Security beneficiaries – benefits worth about $12 billion and scheduled to be paid Oct. 23 could be delayed, according to an estimate by the Bipartisan Policy Center.

* Medicare, military, Social Security beneficiaries – benefits worth about $60 billion scheduled to be paid Nov. 1 could be delayed for up to two weeks.

* Stock markets could turn south if the government is still shutdown and no debt limit resolution sign is near. Many investors would likely dump Treasury holdings.

“There would be a rush to the door,” predicts Steve Bell, an analyst at Bipartisan Policy Center.

* Household wealth would shrink, consumer confidence could plunge and Americans would likely cut back on spending.

* Higher rates on government debt would raise other borrowing costs, including mortgage rates.

What is a default and how could it impact the world’s finances?

A default occurs when a debtor does not meet legal obligations according to the debt contract, such as not making a scheduled payment. If the U.S. were to default on its debts, the fallout could be felt worldwide in the economy. Banks in the U.S. and other countries use Treasurys as collateral when they borrow from each other. If Treasurys were no longer seen as risk-free, it could disrupt borrowing and jolt credit markets. A financial crisis like the one in 2008 could follow. Banks also hold much of their capital reserves in Treasurys. If they fell in value after a default, banks would have to cut back on lending.

Readers respond

The Star asked its Facebook fans how the U.S. could improve its debt issues. Here’s a sample of the response. Want to join the conversation? “Like” The Shelby Star on Facebook.

“The answer is the same as a family's finances...get them in order by not overspending. It wouldn't be wise for you or I to keep asking our credit card company to keep raising our limit while we went deeper and deeper in dept. …”

Mark Brooks

“I am sure there are many things that the government spends money for that is absolutely useless. I have seen a list sometime back of the stupid things that government spends on. There wouldn't be a need for raising the debt limit if someone would stop the unnecessary spending.”

Mary Ann Clark

“…They need to let a couple ‘real life moms’ get a hold of the U.S. Checkbook and let us balance it we would put some checks and balances in place pretty darn quick and show Congress and Mr. Obama how the real people live.”

Mandy Wyatt

"You cannot do anything when all is out of sync ... politicians who have forgotten what ethics and responsibility for 'we the people.'"

Annie Arledge

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